Clarifying the Costs of Addressing Climate Change

Two of the world’s most prominent climate modeling approaches disagree on how much mitigation measures will cost. A new analysis, co-authored by YSE’s Matthew Kotchen, identifies the main source of the problem and ways to address it.

How much will it cost to meaningfully reduce greenhouse gas emissions on a global scale? The answer, according to a new analysis co-authored by Matthew Kotchen, professor of economics at the Yale School of the Environment, is that it depends on who’s doing the calculation.

In a new study published in Science, Kotchen, and co-authors James Rising, assistant professor at the University of Delaware and Gernot Wagner, Columbia University climate economist, map out a large discrepancy in the two core modeling approaches that are used today. One is  the “bottom-up” approach used by the United Nations Intergovernmental Panel on Climate Change, which measures emissions sector by sector. The other is the “top-down” approach (known as integrated assessment models, or IAMs) favored by economists, which studies tradeoffs — how investment in greenhouse gas (GHG) mitigation comes at the expense of other potential investments.

The  costs of mitigation are considerably lower in one section of the 2022 IPCC’s Sixth Assessment Report than they are in standard economics focused IAMs. Driving this difference is an assumption within IPCC models that many climate mitigation measures save money,

“Many of the emission-reducing activities that the IPCC considers may save on the explicit out of pocket expenses, but this does not mean they provide a proverbial ‘free lunch,’” says Kotchen.

One example is electric vehicles. The overall cost of an EV, when taking into account things like maintenance and operation, might be estimated below the cost of a comparable car with an internal combustion engine. EVs are also associated with lower emissions, so with this model it appears that adopting an EV would have both a climate and economic benefit. In total, the IPCC estimates that enough EVs and other “win-win” technologies and processes exist to cut emissions by 16% by 2030 while saving money across the global economy.

The economics IAMs take a different approach. These models begin with the idea that there are no activities available that both save costs and cut emissions, the authors explain. The basic reason for this assumption is that mitigation activities must be costly or they would already have been adopted and that calculations that find a cost savings must be missing other indirect or unobserved costs.

It is likely the IPCC estimates are overly optimistic about how little it will cost to reduce emissions, but the economics IAMs are also likely to be overly pessimistic. The true costs are likely between these two extremes.

Matthew KotchenProfessor of Economics

These different avenues of logic lead to substantially different conclusions. If countries were willing to invest in actions that cost up to $50 per ton to mitigate GHG emissions, the IPCC models anticipate that this would generate a reduction of 43% by 2030; the economic models instead project only a 26% reduction of GHG emissions.

The critical questions, note the researchers, are which starting point is more helpful for understanding how costly it will be for societies to reduce emissions and which policies will be most effective in prompting these changes?

“It is likely the IPCC estimates are overly optimistic about how little it will cost to reduce emissions, but the economics IAMs are also likely to be overly pessimistic. The true costs are likely between these two extremes," Kotchen says. 

The authors suggest four ways to move forward to resolve the issue:

First, researchers should further explore the 16% of climate mitigation measures that the IPCC suggests can save money. The authors note that this 16% accounts for almost all of the divergence between models. A better understanding of how much mitigation is truly “costless” could bring the models into closer harmony.

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Second, reinforcing the connection between economists and the IPCC and strengthening collaborations between economists and climate scientists could provide a more clear-eyed view of the costs associated with addressing climate change. This, in turn, could help to cultivate more realistic and politically feasible policy proposals.

Third, more research is needed to better understand barriers surrounding the adoption of mitigation efforts and energy efficiency programs. The out-of-pocket costs are not the only barrier. People have “nonmonetary” considerations as well. For example, with cars, consumers have concerns about performance and familiarity with the technology. Behavioral and social science research should look into interventions that can overcome these barriers.

Finally, the standard economic models should be continually updated to reflect the newest information on GHG mitigation costs. Currently, a process exists to update the costs associated with climate change and calibrate them between top-down and bottom-up approaches. Currently, no such efforts  exist with climate mitigation costs.

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